FINRA Cracks Down on Churning: 1 Firm Pays $1.67M, 1 Broker Barred
Churning happens when a stockbroker makes a large number of unnecessary trades in a client’s account — just to generate commissions. Churning was more common in the past, 30 or 40 years ago, but it still happens today.
In fact, on January 8, the results of two churning cases came to light. Arbitrators from the Financial Industry Regulatory Authority (FINRA) ruled against the stockbrokers in two churning cases.
Recent Churning Claims Won by Investors
In one of these cases, FINRA arbitrators awarded an investor $1.67 million after a stockbroker from Madison Avenue Securities churned his client’s financial accounts. Other violations also came to light, including breach of fiduciary duty, unauthorized trades, failure to supervise and unsuitable trades.
In the other matter, an arbitration panel ruled against an Ameriprise stockbroker, who churned his retired, 82-year-old client’s account. The stockbroker made 101 transactions resulting in unnecessary commissions of $34,889, and an additional $19,391 in trading losses. Unauthorized trading was an issue in this case as well. Ultimately, the arbitrators barred the stockbroker from working in the industry again.
Don’t Let Churning Happen to You
Although churning is viewed as rare, instances continue to surface. So, how do you make sure you don’t become a victim? The first clue to look for is a large annual “turnover” ratio. In churning cases, the broker has to keep selling in order to keep buying. With a $100,000 account, if a broker makes $100,000 worth of purchases in a year, it means that the turnover ratio was 1. Churning doesn’t usually happen until the broker turns over the account several or more times.
Imagine your broker purchased $600,000 worth of investments for your $100,000 account in a year. A turnover rate of six times like this would definitely warrant an investigation.
For individuals who blindly follow their broker’s recommendations — or don’t pay close attention to their accounts — churning can happen without them ever realizing it. In some cases, an account could be worth the same amount on paper after a year of churning. However, if you examine the fees paid, the malfeasance becomes clear. Victims may find that they paid an enormous amount of unnecessary money in commissions and fees.
Churning lawsuits are rare these days. This is mainly due to the small amount of money modern stockbrokers receive in commissions from stock sales. However, these cases still happen. For example, some investments pay higher commissions than others, and a broker might take advantage of this fact. Also, in larger investment accounts, churning can be a problem when brokers profit from moving large amounts of money.
Are any of the following statements true for you?
- Churning could be a problem in your account.
- You see a large number of trades in your account that don’t make sense.
- You want to do your due diligence to make sure everything is okay with your investment accounts.
If you answered “yes” to any of these statements, the Consumer Investor Resource Center is here to help. Contact our investment fraud consultants any time. We will talk to you about what’s happening in your accounts, let you know what we think is happening, and advise you of your legal rights and options.